ARKO Corp.

Greetings and welcome to the ARCO fourth quarter and full year 2024 earnings conference call. At this time, all participants are in a listening mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I now have to introduce our host, Jordan Mann, Senior Vice President of Corporate Strategy and Investor Relations. Thank you. You may begin.

Thank you. Good afternoon and welcome to ARCO's fourth quarter and full year 2024 earnings conference call and webcast. On today's call are Ari Kotler, Chairman, President, and Chief Executive Officer, and Rob Giammatteo, Executive Vice President and Chief Financial Officer. Our earnings press release and annual report on Form 10-K for the year ended December 31, 2024 as filed with the SEC are available on ARCO's website at www.arcocorp.com. During our call today, unless otherwise stated, management will compare results to the same period in 2023. Before we begin, please note that all fourth quarter financial information is unaudited. During this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please review the forward-looking and cautionary statements section at the end of our fourth quarter and full year 2024 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during our call today. Any forward-looking statements made during this call reflect our current views with respect to future events, and ARCO is under no obligation to update or revise forward-looking statements made on this call whether as a result of new information, future events, or otherwise, except as required by law. On this call, management will share operating results on both a GAAP basis and on a non-GAAP basis. Descriptions of those non-GAAP financial measures that we use, such as adjusted EBITDA and reconciliations of these measures to our results as reported in accordance with GAAP are detailed in our earnings release or in our annual report on Form 10-K for the year ended December 31, 2024. Additionally, management will share profit measures for our individual business segments along with fuel contribution, which is calculated as fuel revenue, less fuel costs, and exclude intercompany charges by our subsidiary, GPNP. And now, I would like to turn the call over to Ari.

Good afternoon, and thank you for joining us. 2024 was a challenging year for the industry and both a challenging and pivotal year for us as a company. Despite the challenging macro environment characterized by persistent inflation and constrained consumer spending, we remain focused on executing the strategic initiative that we believe will position ARCO for long-term growth. We continue to work on our transformation plan, including the dealerization program, while continuing to provide our customers with value through food service, expansion of our other tobacco product category, and targeted promotional strategies to enhance customer engagement, and loyalty. Overall, against backdrop of external pressures and in a dynamic environment, we managed the business effectively and delivered results near the midpoint of our annual guidance, reflecting our ability to adapt to market conditions and drive operational efficiencies while maintaining a strong focus on customer value and long-term profitability. Over the course of 2024, we consistently observed a consumer who continues to struggle, as well as evolving customers' preferences, including increasing demand for OTP and higher expectations for food service. In response to what we are seeing, we have made and continue to make investments to meet our customers' needs. I will first touch upon the immediate value we seek to deliver to our customers. We continue to reward our loyalty customers through promotions and have kicked off 2025 with incredible inside stores promotions that provide value on merchandise, but notably that leads to sizable discount on fuel. We recently launched our Fueling America's Future campaign, which offers allow customers to earn up to $2 off per gallon for up to 20 gallons when purchasing value promotions inside the stores. This is not only provides relief to our customers, But importantly, rewards our enrolled loyalty members, which we believe will help grow our loyalty program. During the quarter, enrolled members spend an average of $104 per month, which is nearly 60% more than non-enrolled customers. Additionally, enrolled members visited our stores about three more times per month on average compared to non-enrolled customers, reinforcing the effectiveness of our loyalty strategy. Turning to evolving customer preferences, I stated on our last call that one out of two enrolled loyalty members are cigarettes or OTP consumers. Over the quarter, we announced our OTP category by optimizing merchandising, expanding promotional activity, and leveraging strategic supply of partnership to drive market share gains. Our back bar refresh initiative has allowed us to improve space allocation and expand product assortment, to align with shifting consumer demand. As of the end of the fourth quarter, we completed more than 800 tobacco back bar refreshes and expect to refresh 100 more in the coming weeks. Our strategy around OTP during the fourth quarter led to a 200 basis point improvement in gross margin for OTP category, further widening the gap between higher margin OTP and traditional cigarettes. Notably, OTP represented nearly half of our total tobacco category contribution in the fourth quarter. Continuing with this momentum in the category, since the start of 2025, we have ramped up promotional activity in OTP and cigarettes, offering significant deals to customers to further drive sales momentum. Additionally, while we are working towards receiving permits for our seven pilot stores that will include an announced food service offering, we have seen strong customer response to the upgrade we have already made to our food service offerings, reinforcing our focus on delivering value-driven options. Our promotional efforts, including frozen and hot pizza, bakery, Nathan Famous hot dogs, and roller grill deals, continue to gain traction. In fact, We have sold more than 600,000 pizzas since launching our 499 pizza special in Q1, 2024. We are refining our food service strategy to enhance convenience, quality, and profitability, driving trial and repeat purchases through targeted promotions and bundling strategies. Turning to fuel, although retail fuel volume declined for both the quarter and year, Our pricing strategy helped preserve margin despite lower demand, lower fuel costs, and reduced price volatility, a backdrop which normally puts pressure on the ability to expand margin. Same-store retail fuel gallons were down mid-single digits for the fourth quarter and year, while same-store retail fuel margin was only down 1.1 cents per gallon in the fourth quarter as compared to the prior year period and up 0.7 cents per gallon. the full year lastly over the quarter we made meaningful progress on our dealerization program as part of our broader transformation plan we are strategically converting select retail stores to dealer sites where we believe we can generate higher contribution dollars through ongoing fuel supply agreements and rental income rather than continue to operate these locations within our retail segments our approach is centered on optimizing our portfolio, allowing us to focus our resources on high performing retail stores while leveraging our dealer network to announce profitability across our entire platform. We've set our initial targets for dealerization, having converted more than 150 retail stores to dealer sites in 2024. We expect to convert a meaningful number of additional stores over the course of 2025 with approximately 100 more stores to be converted by the end of the first quarter. Surpassing our conversion goal in 2024 is a testament to our team's focus and execution. Rob will provide more substance to the numbers later. However, we now expect our total dealerization program to generate an annualized benefit in excess of $20 million to combine wholesale and retail segment operating income. with additional opportunity from G&A expense reduction. As we move into 2025, our focus remains on our strategic priorities while delivering value to both our customers and stakeholders. We believe our disciplined approach to growth, operational efficiencies, and customer engagement initiative will position ARCO for long-term success. With that, I will turn over to Rob to discuss our financial results and our 2025 guidance.

Thank you, Ari. Good afternoon, everyone. Turning to the fourth quarter, total company adjusted EBITDA was 56.8 million compared to 61.8 million for the year-ago period, with the decrease caused primarily by lower retail fuel and merchandise contribution. At the segment level, our retail segment contributed approximately 62.9 million in operating income compared to 72.3 million for the year-ago period. Same store merchandise sales, excluding cigarettes, were down 2.1% versus the year-ago period, while total same store merchandise sales were down 4.3%. Same store margin rate was relatively in line with the prior year. Same store fuel contribution was down 7.1% for the quarter, caused by a decline in gallons and lower year-on-year fuel margin per gallon. Same store fuel gallon demand was down 4.4% for the quarter, while fuel margin of 38.7 cents per gallon was down 1.1 cents per gallon from the year-ago period, resulting from lower fuel costs and reduced price volatility this year. Same-store operating expenses were down approximately 1.2% for the quarter. Moving on to our wholesale segment, operating income was 20 million for the quarter compared to 18.1 million in the year-ago period. with the increase primarily due to our channel optimization work. Inclusive of channel optimization, gallons were relatively in line with the year-ago period. Fuel margin was 9.3 cents per gallon for the quarter, up 0.3 cents per gallon to the year-ago period. For our fleet segment, operating income was 12.4 million for the quarter, compared to 9.7 million in the year-ago period, with total gallons down 1% to the prior year. Increased segment operating income was driven by resilient fuel margin performance, which was 45.2 cents per gallon for the quarter versus 36.7 cents per gallon in the year-ago period. Total company general and administrative expense for the quarter was 39.7 million compared to 38.1 million in the year-ago period, with the increase primarily due to lower stock-based compensation expense in the prior year period. Excluding the year-on-year change in stock-based compensation, general and administrative expense was down 2% to the year-ago period. Net interest and other financial expenses for the quarter were $19.7 million compared to $22.9 million in the year-ago period, with change caused primarily by fair value adjustments related to our warrants. Net loss for the quarter was $2.3 million compared to a net income of $1.1 million for the year-ago period. Please reference our press release for a detailed reconciliation from net income and loss to adjusted EBITDA. Full year 2024 total company adjusted EBITDA was $248.9 million versus $276.3 million in the year-ago period. And full year 2024 net income was $20.8 million versus $34.6 million in the year-ago period. Turning to the balance sheet, we have substantial liquidity of approximately $841 million, including $262 million in cash on hand at quarter end, along with remaining availability on our lines of credit. Our $140 million ABL remains completely undrawn as we continue to manage working capital needs from operating cash flow. Excluding lease-related financing liabilities, we ended the fourth quarter with $881 million in long-term debt. comprised of our 2029 senior notes, the outstanding balance on our Capital One line, and the remainder primarily related to real estate and equipment financing. Total capital expenditures for the quarter were $36.1 million, with full year 2024 capital expenditures of $113.9 million. Turning to full year 2025, We expect total company adjusted EBITDA to be in the range of $233 to $253 million, assuming a retail fuel margin of $39.5 to $41.5 cents per gallon and mid-teen percent operating profit growth in our wholesale segment, driven by our ongoing channel optimization work. For the first quarter of 2025, we expect total company adjusted EBITDA to be in the range of 27 to 33 million. We expect our same store base will change materially as we move through 2025 due to our channel optimization work and that our retained retail stores will be more productive for both merchandise sales and gallons as compared to average performance per store in the year ago period. As a result, we have set up our retail guidance framework to walk you from Q1 2024 average per store performance to estimated Q1 2025 total retail segment merchandise sales and gallons. Our retail segment guidance is supported by the following key assumptions. We are estimating our Q1 2025 average retail store count to be 1,339 stores, reflecting the impact of our ongoing channel optimization. Using Q1 2024 average per store performance as a base for Q1 2025, we expect an increase in productivity will partially offset a decline in same store sales, resulting in a low single digit decline in merchandise sales per average store compared to the year ago period. We expect merchandise margin rates to be generally in line with the year ago period. For fuel, We expect an increase in productivity will more than offset a decline in same store fuel gallons, resulting in a low single digit increase in gallons per average store compared to the year ago period. And we are assuming a retail fuel margin in the range of 37 to 39 cents per gallon. Moving on to our wholesale segment, we expect mid single digit operating income growth driven by our ongoing channel optimization work. And finally, for our fleet segment, we are expecting high single to low double-digit operating income growth driven by expected resilient fuel margin per gallon. And with that, I'll hand it back to Ari for closing remarks.

Thanks, Rob. I will close with some additional comments on our first quarter guidance. Edwins from adverse weather conditions unfavorably impacted customer mobility and sales across key regions. By these challenges, our discipline execution and ability to adopt help minimize the impact. Seasonal softness in the first quarter is not unusual and we would rather navigate this weather related challenges now than during the peak summer month. With the weather, we plan to continue to operate the business and control what we can control, optimizing operations, maintaining pricing discipline and delivering value to our customers. On a positive note, Fuel margin was up 2.5 cents per gallon in January to the prior year, demonstrating both the strength of our pricing strategy and the resilience of our business. As we wrap up, I want to reiterate our focus on adopting the dynamic market landscape. We remain committed to our dealerization program, food service, strategic store transformation, and value-driven initiatives. I'm optimistic about our strategies including our Fueling America's Future campaign, which reflect our commitment to making fuel more affordable while helping families and small businesses managing rising costs. We look forward to continue providing value-driven discounts on key essentials to support the communities we serve. Finally, I want to thank our employees for their hard work and dedication this quarter, and in the quarters ahead, and for taking care of our customers every day throughout the year. With that, we will open it up to questions.

Great, thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment please while I pull for questions. And our first question is from Bobby Griffin from Lane and James. Please go ahead.

Good afternoon, everybody. Thanks for taking my questions. I wanted to, I want to first start on the 2025 guidance and you know, the midpoint implies it's down a little bit year over year with about a penny or penny or so more in fuel margins. So can you just maybe help connect? those dots because I know you got some of the dealerization savings starting to flow through, but I imagine there's some other cost pressures that you're dealing with in the business as well. So just trying to connect kind of going on there, those building blocks.

Yeah, Bobby, as you think about the full year, again, we're staying pretty high with the guidance right now. And as I mentioned in my prepared remarks, We're going to have a shifting same-store base as we go through. So the same-store metrics we would normally give you at this time are going to be a little less relevant as the base changes, which is why we're steering people to the average. So as I mentioned in the Q1 guide, we are seeing a negative same-store trend right now in gallons and in merch sales. And again, I want to steer away from same-store because the base is going to change, but you do know we are facing that. And that underlying that is going to put some pressure. We are expecting things to improve as we go through the year, but we do see a negative trend right now. And I think as you've probably heard from others, January, February has had some significant weather impact, and there's a bit of a drag starting the year off. So that's really what we're looking at. We do expect, again, those average store metrics, we do expect those to improve as we go through the year. And, again, both on the merch side and the gallon side. Okay. Okay. That makes sense.

And then maybe is there a building effect as we move through the year from the dealerization savings or is that kind of prorated each quarter? And, you know, is there a step function change of that savings as we enter 26th?

Yeah, so you should expect, I mean, in the guidance, we gave you the wholesale segment being up mid-single for the first quarter and up mid-teens for the year. So that is going to accrue as we go through, as we get more and more stores. The cumulative impact is going to become greater and greater. And as Ari mentioned in his prepared remarks, we will start to see more G&A savings as we start to streamline the business for the new retail footprint. So that will continue to accrue as we go through 2025, and there will be a wraparound into 2026.

Okay, and then I want to maybe pivot, you know, appreciate all the details on the dealerization side of things. Can we maybe switch and talk about the stores that are left in the base? You still got a lot of stores there. Where are we in the remodel initiatives? I know you guys have done some stuff with the back bar, but what else are some of the initiatives for 2025 to help kind of the existing or the remaining, let's call it remain co of stores that are in the retail network during 2025?

Yeah, as I mentioned, Bobby, earlier, I mean, we started a campaign called Fueling America's Future. This campaign is supposed to take care of our customers, given that everybody is feeling the pressure right now, the microeconomic pressure. The thought process is really to concentrate on those stores. We are leveraging our strategic supplier partnership, and we are going to target on promotionals that basically will encourage our customers to buy fuel. You know, in the past, the way we look at our business, in the past, usually you count on people that come into the pump and from the pump go inside the store. We're actually shifting gears over here, and we are actually encouraging customers that are coming inside the store right now to buy fuel. I mean, we are going to provide with Fueling America's Future, we are going to provide up to $2 off per gallon which is up to 20 gallons. You know, the average gallon per consumer is around, you know, anywhere between 9 to 11. And this is going to be equal to $40 saving on a gas fill-up. And we're talking about every transaction, you're going to be able to stack basically your saving, which means that at the end of the day, you can visit our stores three, four times a week, and all of a sudden end up with $40 savings on your next fill-up. And this is where we're actually shifting most of our energy right now. In addition to that, you just mentioned the back bar. In 800 stores, we have another 100 stores that we are just getting ready to complete in the next few weeks. But the idea is really to concentrate on OTP, tobacco, and fuel. If you think about that, one out of two customers coming to our stores is at least one out of two customers is a tobacco consumer. And this is where we see people actually, you know, basically concentrating right now. And, you know, this is really going to be the promotional activity for 2025. Tobacco and provides great promotional, basically deals on tobacco and at the same time, concentrate on fuel to answer your question regarding to remodeling we have the seven pilot stores um you know that we actually talked about them i mean we are in a really at the end of the process of permits you know permits take a little bit longer but we are actually finalizing the permits and we believe we're going to start construction in late march of at least two of those stores so those are the things that we're doing in addition to of course food service and you know, all of the other things that we spoke in the past. And I'm more than happy to elaborate.

Okay. And yeah, Ari, I mean, if it's easier, we can go through it offline. But just the $2 off aspect of fuel, maybe, you know, that's obviously a very big discount. So how does that, you know, translate into maintaining the profitability or actually driving further profits and EBITDA of this business? Is it, you know, the requirement of some type of inside the store purchase? Just help us connect that because when we hear $2 off on a $4 or $5 gallon, It sounds very significant and there's a question on maintaining the profitability level as well.

Yeah, that's not going to touch profitability in a way. It's not going to actually apply to margin. It's really all about partnership and combination with our partners, which is basically our vendors. It's not going to touch profitability. It's not going to decrease margin inside the store and it's not going to increase margin outside the store. As a matter of fact, we believe... uh you know with this promotion we believe we're going to be able to drive gallons that's really what we're trying to do over here we're trying to drive gallons uh and combination between people that are coming to our stores today uh you know to buy you know everyday uh you know essential products but they're not purchasing fuel remember we are operating in a lot of role uh locations a lot of small towns so many times customers that come to our stores are not necessarily buying fuel And vice versa, there are customers that are just driving to the pump and they're not getting inside the store. We believe with those promotions, we believe we're going to see some big correlation between the two. But to be clear, this is not going to, you know, in our guidance, we are not planning on reducing margin, fuel margin, or reducing margin inside the stores.

Okay. I appreciate the details. I'll turn it over to somebody else. Thank you for the time.

Thank you, Bobby.

Thanks, Bobby.

Next question is from Kelly Benya from BMO Capital Markets. Please go ahead.

Good evening. Thanks for taking our questions. I was wondering if you could just help us a little bit more understand the remaining retail stores here given these shifts with the dealerization and just give us some insight into how those same-store sales and gallons are trending for the remaining stores if you take out the 250 cumulative stores that will be dealerized by the end of Q1? Just what's happening? We have some of the disclosures from the release, but what is happening on a same-store sales and same-store gallon trend for the remaining stores? Robby, would you like to take it?

Sure. Yeah, Kelly, those stores outperformed, as you might expect, they outperformed the balance of the company for Q3 or Q4, excuse me, and are outperforming Q1 quarter to date. So again, we're going to give it a little bit more run rate before we're calling out those trends, but they are higher, still negative, but they are higher than the balance of the chain. And again, we're watching that and we would expect that to continue. And as I mentioned in my prepared remarks, these are more productive stores. So again, we're going to benefit from stores that are more competitive, able to drive business versus perhaps some of the macro trends that have been weighing on some of the less competitive stores.

And just to add to it, Kelly, that was from the get-go, that was part of the transformation plan. You know, part of the transformation plan is to make sure that we are concentrating on the best stores, you know, we are concentrating on stores that we believe at the end of the day will actually, we have some, you know, some organic growth potential and the stores that we just believe that mature or we don't see the, you know, the increase in organic growth, those are the stores that we're basically shifting to the oil cell segment.

Got it. Yeah, that's helpful. So it sounds like they, They are more productive. They are performing better, but they are still negative. So I'm just trying to understand the magnitude of the sequential improvement, if I'm hearing that right, on the merchandise comp front as we move through 2025, what you're expecting, what you're seeing at a category level, just trying to understand since we don't really have the comparisons.

Right. And, Kelly, that's one of the challenges, again, as we're talking about comp or same-store sales. We want to steer you – we will still be providing same-store detail. We'll be reporting it. But in terms of guiding it, because we're not giving you the same-store base, it's going to be impractical for you to model it that way. And, again, so if you think about what we're talking about right now, these more productive stores are offsetting that negative same-store trend both for merch sales and for gallons. where, again, the average store, if you're modeling at the average store, is going to be down low single digits in merchandise sales per the average store last year, and they're going to be up low single digits in gallons per average store versus last year. And, again, we will certainly be talking about same-store sales, but for modeling purposes, it's going to be easier for you to get to our numbers modeling it that way.

Okay. And you talked about the Fueling America – America's Future promotion, I guess this is really kind of intended to help your customers, but also to grow gallons. Where do you think, what is in the plan for 2025 with respect to gallons? I guess both at the retail side and the wholesale side, because I think you talked about mid-teens EBIT growth in wholesale. So what kind of gallon assumptions are underlying the whole plan here?

Yeah, so Kelly, we have not typically guided gallons on the wholesale side. And again, as you know, you're driving, you have the metrics for the CTG for the various sites and the gallon growth. If you think about the fourth quarter, just as a proxy, I can give you one data point on that. We had roughly 9 million gallons in the fourth quarter that was related to channel optimization shifting to the wholesale channel. So that can give you an indication that, you know, at the level we're at right now, ending the fourth quarter with 150 stores, we're at 9 million gallons shifting to that channel. So, again, as we add the extra 100 in Q1 and, you know, the modeling that you guys will do for what you're assuming for Q2, Q3, you can see that that's going to get significant.

And Kelly, just to add one comment, because I hear what you just said, I just want to make it clear. It's not only growing gallons, it's growing traffic. That's the reason we are putting all of our energy on Fueling America campaign with fuel. And at the same time, we are actually increasing the promotional activity very heavy on the tobacco and OTP inside the store. We started in Q4. We already saw the results in Q4. In Q4, we were able to increase the OTP margin by 200 basis points. I mean, we see that this is working. And this is where we actually concentrate right now, tobacco and fuel, which we believe are going to drive traffic outside the store and inside the store.

Next question is from Anthony Bonadio from Wells Fargo. Please go ahead.

Yeah, hey, guys. Thanks for taking our questions. So I wanted to start out on fuel margins. The guidance range seems to suggest You're pretty constructive on the outlook for fuel margins in 25. So can you just talk about the different assumptions underlying that and how we should think about idiosyncratic contributions versus broader industry trends? Just trying to better understand how you came up with that range.

All right. Do you want to talk about any of the macro? And I can talk about the specific guidance.

I'll touch the macro. You can talk maybe about the guidance, and then I'll talk about the macro.

Yes. Yeah, so Anthony, as Ari mentioned, January was nicely up to last year. And again, January was a softer month last year, but it was up nicely. As we look at the general dynamics of the industry, we do continue to see wage increases and things on the operating expense side of the business as we continue to have same-store traffic challenges that are not specific to us, but other players as well as the mom and pops in the space. This is one of the areas where we continue to see structural increases. Again, we have it up modestly for the full year, but we do continue to see some of the trends that we've seen from 23 and 24 moving into 25. So again, we're constructive on it, you know, based on our pricing strategies, based on what we expect to happen with competitive set. And again, we look at that as the lever that players are going to go to to offset some of the traffic challenges, at least coming out of the first quarter.

Yeah, and just to add to it, Anthony, you know, as always, our strategy is to maximize fuel contribution dollars. I know we're very robust on, you know, TPG from, you know, basically from a margin standpoint. The one thing I want to remind you and everybody, of course, is that we finished 2024 with basically 5% decline. I mean, that was based on, of course, you know, published information from Opus. We were 5% in 2024. We are hopeful that the price of fuel will start with a 2 and not with a 3. In some areas of the country, it starts with a 2. I believe that the price of fuel will start with a $2 versus $3. I believe that we're going to see some gallons increase countrywide. That's my belief. And this is one of the reasons that we launched the Fueling America's Future campaign. to go after gallons, to grab gallons, and of course to make sure that we increase traffic inside the store, given at least what we see from a microeconomic standpoint. We believe that this is going to be very important for our business, for our stores, in order to actually increase traffic.

Got it. That's helpful. And then just on same-store OPEX, it looks like that decreased 1.2% in the quarter, which is actually the third straight quarter of declines there. Can you just talk about the key drivers of that and just how you're thinking about the opportunity for further improvement there as we move into 25?

Sure, Anthony. So, you know, obviously, you know, some of the expense reductions are a result to the top line reduction, right? So as we have lower top line, we're going to have less demand in the store for labors, for stores that are not on minimum coverage. We have lower credit card fees. You know, some of those lower traffic, you know, would be repair and maintenance, less wear and tear. I mean, Some of those reductions are, you know, you would take an increase to see stronger sales. So, again, we're managing what we can control effectively. But, again, as you go forward, you would love to see the same store sales turning positive and you'd like to see a little bit of, you know, growth in the OPEX that would be driving more margin to the bottom line. So, again, we're managing what we can control well. I think, again, as we are looking at the first quarter and we're suggesting to you that, you know, our same store trends and gallons are down, You know, expect we're going to be managing OPEX as best we can on that front as well, as well as G&A expenses, and that's the trend we're looking at right now. Obviously, we are expecting and we're modeling that things pick up as we move through the year. So, again, we're just where we are right now with these negative trends.

Got it. Thanks, guys.

And I believe, Anthony, I believe, by the way, the negative trend, my belief, is that the majority of that is weather-related. just, you know, just for a benefit. I mean, you see what is happening in, you know, most of the country. And I think with the promotions activity that we have and with the concentration on those two top categories, you know, I'm very, very optimistic, you know, going into 2025, especially as we move towards the spring, towards the summer, 100 day of summer starting in May. I mean, I'm very, very bullish on that.

Our next question is from Mark Estrichen from Stiefel. Please go ahead.

Yeah, thanks, afternoon, everybody. I guess maybe just to start on the commentary about weather, any sense of just what kind of impact it had on your business around the industry in the first couple of months of the year? And I guess maybe more broadly, you know, the C-Store channel, if you look at a bunch of, categories sold in the store seems to have started weakening kind of back at fourth quarter of 23. So you're now four to five quarters into just a generally weaker trend. You know, we can see that there's a bit of a shift in consumption of things into mass and grocery channels away from C-stores. I guess I'm curious, you know, one, as I said, just what the weather impact might be. Two, on the other piece of it, just whether Do you think there's any impact on that shift from a consumer perspective in terms of just being spread thinner and trying to purchase things more in bulk, take home instead of an immediate consumption? And then does that reverse as or if the consumer environment improves? Thanks.

Yeah, I'll jump directly into it. I think that the consumer is basically feeling the pressure, the microeconomic pressure, especially in the areas that we do business. So I really believe it's related to the pressure, to the inflation, to the pressure on the consumer. And this is the reason, by the way, that we are concentrating, as I said earlier, we are concentrating, Mark, on fuel and tobacco. Because those two categories, if you think about it, you know, between fuel and tobacco, those two categories represent probably 70% of our revenue. And this is the area that's going to bring traffic inside the store. You know, we have, you know, very, very, very big promotions related just to those two categories because I don't think those two categories are declining. Yes, cigarettes declining, but you know what? OTP is picking up, you know, in exchange of cigarette declines. You know, fuel, you know, is declining. You know, we saw what happened in 2024. So instead of just sitting on the sideline, what we are doing, we're basically very, very active on those two fronts. And, you know, that's the reason when I, you know, when I brought the Fueling America Future, you know, we picked up to $2 oil per gallon. We believe that's going to drive traffic, that's going to drive gallons, which were hurt over the past, you know, basically, you know, few years. Related to the weather, I mean, you see what happened in weather. I mean, you know, the weather in the middle of January, we had snowstorms in so many areas in the country that we usually don't see it. I mean, we, you know, and we, you know, we had another one, you know, in February. But as I said, I mean, that's, I think, a part of our guidance. This is something that, you know, we take into account. And, you know, to be honest with you, I prefer to have those weather issues during January, February, rather than having them during the summer. So it's not something, you know, that we, you know, it's unexpected sometimes, you know, during this time of the year.

And Mark, we have been looking really aggressively to try and baseline what that trend impact is, and it has been so noisy, you know, even by region that it's difficult to establish a baseline. There have been so many weather events and they've been so broad and sustained, whether it's precipitation or whether it's temperature, it's very difficult for us to read the trend. That's why, you know, we do believe there's an impact, but quantifying it at this point has been challenging. And we're seven weeks in and it's been tough to read. There's been that much volatility with the daily performance.

Got it. Okay. And then maybe just a clarification. So, I guess I could be wrong thinking strategically, but I feel like historically when we've talked about focus on fuel margin versus fuel gallons, you've been focused more on margin. And now it sounds like with the promotion, you're implying that you're focusing more on gallons. Is there some shift within the company to do that?

No, no, no, no, no. So to be clear, Fueling America's future is really to drive traffic. We are concentrating on traffic. We are not going to change. We always, as I said, our strategy is to maximize fuel contribution dollars. Nothing is going to change over here. The idea with those promotions is we believe by definition, the minute you give up to $2 off per gallon, we believe that you're going to be able to increase gallons just by doing that. But the real reason for that is really to get basically the traffic inside the store. Because in order for you to get those promotional, to get those basically, you know, those discount, those big discount, you need to get inside the store to get them. And we believe that's gonna drive traffic inside the store.

Okay, thank you. Thank you.

Next question is from Crew Martinson from Jefferies. Please go ahead.

Good afternoon. When you look at the conversion of the retail stores, what do you think the core of these kind of higher-performing stores is within that channel?

What do you mean the core of the higher-performing?

So if we're averaging right now a little over 1,300 stores that we'll get down to, Like, what do you think is the core that when you're done with the dealerization is that kind of goes forward as a better improved, faster growing retail channel?

Rob, would you like to take it?

Yeah, I think this is one that as we've talked about before, you know, if you look at our Q4 dealerized sites was over 100 and we're guiding for 100 on Q1. We're not sharing forward plans in many parts. We've got a number of counterparties, and we've got, you know, internal targets that we have to make sure we are comfortable with before we release externally. We obviously are modeling our full year to have a certain count transition, but we are only sharing Q1. Again, you can make your own, you know, determinations, but I'm looking at what Q4 is and Q1 is. Ari mentioned that he expected to be a meaningful impact. So, again, I'm going to leave that. to your discretion to model yourself. But again, we do expect it to be meaningful. The organization is postured and pivoted to aggressively pursue that. And again, we'll be updating this on the quarter and giving you much more detail as we have it.

And I just want to be clear. It's not about the quantity. It's about the quality, just to be clear. You know, quantity, we care less about the quantity. We care more about the quality. We are, you know, as part of our transformation plan, You know, the thought process is really we want to make sure that we keep stores, that we have huge economy of scale. We see the opportunity to invest in those stores. We see huge opportunity to increase profitability in these stores. We see, you know, we're going to optimize our footprint and allocate resources for more efficiency. I mean, those are the things that we are doing over here. So at the end of the day, the stores that we would like to end up with, are the stores that we see a huge upside for ourselves. By the way, the other stores are great stores. We are moving them to the wholesale segment just because we believe that some of those dealers are just great entrepreneurs that they can actually run those stores terrific. We just feel that we need to spend our time and resources in areas that we see that we have huge organic growth opportunities over there. And that's what we're doing over here at the end of the day to increase profitability. The bottom line is, we're going to increase profitability by actually shifting. And I think, by the way, this is, I think the unique thing about Arco that, you know, we are a little bit different than some others. When we bought Empire, you know, four years ago, you know, that was not exactly the plan, but I think that's the luxury right now that when we have over around 2000 dealers today, we basically have 2000, you know, you know, customers. that are going to be customers for some of those stores, are going to be dealers for some of those stores that we control at the end of the day. And I think that's the unique place that we are sitting right now.

And when you think about optimizing that footprint, is it exiting certain regions, or is it more just kind of, or potentially adding to more regions, or is it more kind of going by in a store-by-store basis?

we are going store by store basis. And at the end of the day, I mean, of course, if we have one store that we feel this is like an unbelievable store that got huge potential of growth, but next to it, there are three stores that do not have the potential growth that we see over there, you know, obviously we're going to have to exit this region. So yes, we are concentrating on regions, we are concentrating on states, we are concentrating on areas that we see opportunity for growth. I mean, we see we're looking on, you know, I can go on and on and on. We're looking on demographic. We're looking on population. We're looking what happened, what increased, you know, what happened in the market. But, you know, it's really store by store basis. I mean, the analysis that we started last year as part of our transformation plan, it's literally by store.

Thank you very much. Appreciate it.

Absolutely. Thank you.

This question is from Hal Hoden from Barclays. Please go ahead.

Hey, afternoon. I have two questions. The first one is, just holistically, if I think about your guidance, the EBITDA guidance for the year, the midpoints, 243-ish, you guys did 248 and 24. So I'm trying to figure out how to bridge to the $20 million in dealerization savings that you expect to get over time and you know, why perhaps we're not seeing that flow through into the annual EBITDA guide?

Sure, I'll take that one. So, as you think about the 20 million, again, that's at an annualized run rate. As you know, we are, you know, we'll start to annualize the activity in Q3 of 2024 from the start of this program, right? So, we are not likely to be at steady state until later in 2025, you know, possibly 26, but like, you know, that is when the run rate would be achieved. So we are, as I mentioned in prepared remarks, our wholesale profitability was up $2 million in the fourth quarter due to the channel optimization work. So if you translate that out at the current level of run rate, you'd get that $8 to $8.5 million that we talked about last quarter for the stores that were done at the end of the fourth quarter. The stores that are being done right now, we've got another 100. As I mentioned, there's more to come. So you will not be at the annualized run rate until you're far deeper into 2025. And that's the reason you're not seeing the full 20 million accrue in 2025. Okay.

So maybe another way to think about it is what would the – I mean, how do I think about an apples-to-apples number? Because you guys have a lot of moving parts. I'm trying to – obviously, absolute EBITDA is lower, but it does feel like, you know, we're – the dealerization is – Maybe resulting in lower EBITDA, or is it just that we think the trends are going to be lower from now?

No, it's certainly accretive. It's definitely not – it's an accretive program. I think if you can look at 2024 versus 2023 – and look at the same-store performance metrics for merchandising and gallons, you can pretty quickly get yourself to a place that says, if I'm negative, pick a number, negative, low, single-digit, same-store sales or same-store gallons. And, again, I'm not guiding you on same-stores. I'm just saying if you're negative, you should be able to do the math that says, what does my same-store business do and what is the organic decrease there? What we're doing here is a bridge to optimize the channels, right, to provide some buoyancy to the P&L that's going to offset some of those trends that have been in place for a while. It has to be transitioned to more of that, you know, already talked about activating the core customer and then transitioning into that longer-term food and the store remodel program. That's the strategy. So, you should be thinking about this as purely an accretive program for channel optimization, offsetting some of the same store trends. And again, if you do the math from 23 to 24, you should be able to get to a place that says, you know, what is the underlying same store business doing, understanding that same store base is going to be moving significantly quarter by quarter.

Got it. Just to add one more thing, just to add one more thing. As I mentioned earlier, you know, I mentioned meaningful number of stores are going to be converted. So at the end of the day, you know, it's also about timing, just to be clear. It's all about timing. If we're going to be able to move quickly, you know, things may change. But, you know, we're trying to be careful over here.

Got it. And then the way we're kind of penciling out is you should be free cash flow positive, although I don't really have a CapEx number with the new stores that you're planning to build. So I just wanted to make sure that as you go through this transition, you kind of expect to be free cash flow positive for the year in 2025.

Yeah, so we don't give guidance on CapEx, but if you look at Q4 2024 versus Q4 2023 and full year 24 versus full year 23, you'll find those numbers were relatively consistent. And I think it's, you know, it's reasonable for you to assume that, you know, some of those, some of the spend in 24 related to EMV compliance, things related to, you know, accretive electric vehicle programs that, you know, were available prior administration, you know, some of those spending dollars will be reallocated towards some of those more strategic, you know, the store remodel program, things of that nature. And again, just looking at history, 23 and 24, CAPEX very much in line with itself. And I think it's reasonable for you to assume, you know, positive cash build based on if you model that view. Great.

Thank you so much. I appreciate it.

You're welcome.

Thank you. Next question is from William Reeder from Bank of America. Please go ahead.

Hi. I think I only have one. Given the new dealerization program, is this pretty much a strategy which you are moving forward with as without regard to the external environment, meaning are you still evaluating other alternatives, whether they be acquisitions or divestitures, do all of those, of large numbers of stores or of all the retail stores, would more transformative transactions potentially still be on the table?

Absolutely. Absolutely. Nothing changes. As I mentioned, this transformation plan is something that we started uh you know in the middle of last year and what we're doing right now we're basically executing we're starting the dealerization program around uh third quarter last year uh and you know when we just basically continue in accordance to our plan right now but uh yes nothing is off the table i mean we are going to evaluate everything you know based on return on investment of course and if it's a great opportunity that uh you know become available absolutely we have the team available we have the liquidity uh And M&A is also part of our plan over here.

So I guess that would imply that both directions that I described, which is either a larger acquisition or alternatively a sale of a huge majority or a bunch of stores at a time, both of those would still be on the table.

Is that right? Besides the second piece. On the table right now, we don't have the second piece. The piece that we have on the table right now is tillerization. making sure that we continue with our transformation plan. And if there is a large acquisition, we will be more than happy to look into it. Absolutely.

Got it. Okay. That's all for me. The rest were already asked. Thank you. Thank you.

This concludes the question and answer session. I'd like to turn the floor back to management for any closing comments.

Okay. Thank you very much, operator. Thank you very much, everybody, for participating. I had a lot of questions from you guys regarding to fueling America's future, and I really hope that you guys are going to visit our stores and explore the opportunities. I mean, we are providing up to $2 off a gallon, up to 20 gallons, $40 off per fill-up, and it's a great opportunity for you guys to visit our stores. In the meantime, have a good evening.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.